Microfinance shouldn't do the government's job

It is a requirement of civil society that government obviate the need for payday lenders, writes Carl Packman.

There has been a recent interest in microfinance as a means to draw vulnerable people away from the scourge of payday lending – an industry which saw its inevitable growth over the Christmas period, with the number of enquiries about it at the Citizens Advice Bureau doubling from last year. 

The Financial Times recently ran an article headlined Microfinancier gives payday lenders run for money. Reporter Sarah O'Conner discusses to what extent this type of financial product offers a fairer deal for borrowing money, with more manageable prices attached to loans: £162 on a 52-week loan of £600 compares well with the £25-30 per month you can expect to pay for a loan of £100 with the average high cost credit seller. 

Although relatively rare in the UK, the microfinance movement is over 40 years old. It all began in the early 1970s in Bangladesh and Latin America and since then has seen small but effective support around the world. 

I spoke to Saloman Raydan Rivas, a microfinance expert, about Professor Mohammed Yunnus, the don of the microfinance movement. Rivas told me Yunnus wanted to develop a banking model which did not take advantage of the poor, but he was unsure of how to tap into existing local lending mechanisms, such as self-financed communities, to bring about change on a wider scale. 

Today there are many people trying to realise his dream, and Fair Finance, the case studied in the Financial Times' article, is one. In fact Faisal Rahman, the company’s director, is strongly influenced by the microfinance movement, and hopes to bring it to market in the UK.

But there is something rather rocky about relying on private equity funding, as Fair Finance does (a fact not discussed in the Financial Times article) that makes me worry, both in practice and on first principles. 

Fair Finance was declined investment money by Barclays and the Royal Bank of Scotland when it first started out, and they even had problems with Santander, which would not put up investment alone. When I asked Rahman about it, he admitted it was a setback, and one could argue this is hardly a surprise. Rahman wants funding from investors to sell loans ethically to people, charging low interest, and risking low returns, all to realise a dream of creating a banking model that undercuts usurers and rip-off merchants. 

For all the good he wants, many investors clearly see the words “low return” and run a mile. In short, we cannot rely on the good nature of profit-making big banks to finance ethical, non-profit, lending schemes. But should we expect any private business to do this? Since it is in the interest of the public purse to keep individuals' personal debt profiles down, should ethical lending not be a standard expectation of the government? 

It is surely a requirement of a civil society that the government allocate enough money – for instance, through a credit union – to ensure consumers aren't left with going to payday lenders as their only option.

Having said that, I understand Rahman’s motives. Recently it was reported that a loans company who target personnel in the armed forces with high cost credit at 3,300 per cent interest was sold advertising space in Defence Focus, the magazine of the Ministry of Defence. Is this perhaps a sign of how relaxed public bodies have become about payday lending?

High cost loans for the armed forces has become a big issue. A representative of Waterhouse Baker, who offer financial advice to any serving member of the forces, told me that payday loans is often a short-lived solution, “as many default as the monthly expenditure is too high for the income gained”. 

Problems like these need solving fast, because the problem of high personal debt is one which affects the whole economy and the whole society. For me, the buck stops with the government.

Given the enormity of the problem of debt, government should be in charge of reversing it. So while the aims of Fair Finance and other similar organisations are positive, pricing out payday lenders should be chiefly the preserve, not of microfinance, but of the state as part of its commitment to maintaining a civil society.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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Benn vs McDonnell: how Brexit has exposed the fight over Labour's party machine

In the wake of Brexit, should Labour MPs listen more closely to voters, or their own party members?

Two Labour MPs on primetime TV. Two prominent politicians ruling themselves out of a Labour leadership contest. But that was as far as the similarity went.

Hilary Benn was speaking hours after he resigned - or was sacked - from the Shadow Cabinet. He described Jeremy Corbyn as a "good and decent man" but not a leader.

Framing his overnight removal as a matter of conscience, Benn told the BBC's Andrew Marr: "I no longer have confidence in him [Corbyn] and I think the right thing to do would be for him to take that decision."

In Benn's view, diehard leftie pin ups do not go down well in the real world, or on the ballot papers of middle England. 

But while Benn may be drawing on a New Labour truism, this in turn rests on the assumption that voters matter more than the party members when it comes to winning elections.

That assumption was contested moments later by Shadow Chancellor John McDonnell.

Dismissive of the personal appeal of Shadow Cabinet ministers - "we can replace them" - McDonnell's message was that Labour under Corbyn had rejuvenated its electoral machine.

Pointing to success in by-elections and the London mayoral election, McDonnell warned would-be rebels: "Who is sovereign in our party? The people who are soverign are the party members. 

"I'm saying respect the party members. And in that way we can hold together and win the next election."

Indeed, nearly a year on from Corbyn's surprise election to the Labour leadership, it is worth remembering he captured nearly 60% of the 400,000 votes cast. Momentum, the grassroots organisation formed in the wake of his success, now has more than 50 branches around the country.

Come the next election, it will be these grassroots members who will knock on doors, hand out leaflets and perhaps even threaten to deselect MPs.

The question for wavering Labour MPs will be whether what they trust more - their own connection with voters, or this potentially unbiddable party machine.